Magazine

Published in March 2013

Best Game in Town

By John Keefe | March 2013
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There is a sound logic to preferring emerging markets

Institutional investors have embraced the equities of the emerging markets in the last five years, adding to their investments as they have liquidated their holdings of companies in developed economies. Up from 6% in 2008, emerging markets equities now make up about 10% of institutions’ overall equity holdings, according to eVestment Alliance data.

There is a sound logic to preferring the emerging markets. Economic growth is forecast to be far stronger in these markets than in the U.S. and Europe. And even though past growth has been led by exports to the developed world, the expansion is expected to accrue to companies that serve the local economies, which are growing in both numbers and wealth. In a world of slow growth, emerging markets equities could be the best game in town.

“The secular story for owning emerging markets equities is based on four factors—population growth, rising per capita incomes, urbanization and growth in GDP [gross domestic product],” observes Zainul Ali, head of investment manager research for the Americas at consultant Towers Watson, in the firm’s Toronto office. “Population growth and urbanization of countries that have been rural drive the demand for all sorts of things,” he explains, “and when that is matched with rising incomes, you get growing local demand that benefits the local companies.”

According to the International Monetary Fund (IMF), in its January World Economic Outlook Update, the emerging market and developing economies are slated to grow at 5.5% in 2013 and 5.9% in 2014. 

 

The “domestic growth” thesis is crucial to the investment case for emerging markets equities. Growth in the developed economies—in the past, the emerging markets’ best customers—will not likely support an expansion like the export-driven boom of the last two decades. Economic gains in the U.S. are expected to be just 2% in 2013 and 3% in 2014, while Europe, after shrinking in 2012 and 2013, will return to the black only in 2014, with projected growth of just 1%.